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WILSON v. UNITED STATES

April 4, 1966

Sarah A. Wilson, now known as S. A. W. Hooker and George C. Wilson, executors of the Estate of George C. Wilson, Jr., Deceased
v.
United States of America


Kirkpatrick, District Judge.


The opinion of the court was delivered by: KIRKPATRICK

KIRKPATRICK, District Judge.

 This is a civil action for refund of estate taxes paid by the plaintiffs, executors of the estate of George C. Wilson, Jr., who died October 26, 1951. The parties have submitted the case to the court upon the pleadings and a stipulation covering all relevant facts, together with another stipulation specifying "the legal issues for determination by the court."

 The estate tax return, filed January 21, 1953, reported a total gross estate of $262,793.23 and deductions of $207,799.03. When the specific exemptions were deducted, the net taxable estate became zero and it was so reported. Upon audit of the tax return, the Internal Revenue Service determined a tax deficiency of $22,279.48.

 The decedent at the time of his death was the life beneficiary of a spendthrift trust created by his father which gave him a power of appointment of the corpus exercisable by will. By his will, he exercised the power in favor of his wife and children.

 The first issue presented by the stipulations above referred to is whether the decedent's power of appointment is a "general power of appointment" within the provisions of Section 811(f)(1) of the Internal Revenue Code of 1939, as amended. If so, the trust assets were properly included in the decedent's gross estate.

 A number of decisions of the Pennsylvania courts have been cited by the parties, but in Morgan v. Commissioner, 309 U.S. 78, 80-81, 84 L. Ed. 585, 60 S. Ct. 424, Justice Roberts, speaking for the court, said,

 
"State law creates legal interests and rights. The federal revenue acts designate what interests or rights, so created, shall be taxed. Our duty is to ascertain the meaning of the words used to specify the thing taxed. If it is found in a given case that an interest or right created by local law was the object intended to be taxed, the federal law must prevail no matter what name is given to the interest or right by state law."

 The instrument creating the trust contains two paragraphs which bear upon the question. Paragraph TWELFTH provides that, after the death of the decedent, the trustee shall pay the principal to "any person or persons as the said GEORGE C. WILSON, JR. shall, in his Last Will and Testament, direct." The plaintiffs concede that, standing by itself, the paragraph creates a general power and that, unless it is restricted by the NINTH paragraph, the assets passing under it are includible in the decedent's gross estate for tax purposes.

 The NINTH paragraph is as follows:

 
NINTH: Neither the principal nor the income of this trust fund shall be liable for the debts of any beneficiary nor shall the same be subject to seizure by any creditor of any beneficiary under any writ or proceeding at law or in equity, and no beneficiary hereunder shall have any power to sell, assign or transfer, encumber or in any other manner to anticipate or dispose of his or her interest in the trust fund or in the income produced thereby.

 In substance, the plaintiffs contend that this spendthrift trust provision narrows the power created by the TWELFTH paragraph by eliminating creditors from the class of persons in whose favor the decedent could have exercised the power. If this is so, the power would not be general. I am unable to accept this view.

 It seems quite clear to me that the provision in question does not operate to restrict the decedent's power to appoint to "any person or persons" - an expression which, of course, includes creditors - conferred upon him by the TWELFTH paragraph. What it does is to prevent the creditors of the decedent from subjecting the property by legal process to the payment of their claims. It has no effect whatever upon a power exercisable only by the decedent's will and effective only upon his death.

 The next issue is, Are the assets of the trust estate subject to the claims against the general estate within the meaning of Section 812(b) of the 1939 Internal Revenue Code? The words "subject to the claims" are the words of the stipulation. Under Pennsylvania law the decedent's exercise of his power, with nothing more, would not have accomplished a blending of the trust assets with his estate, thus permitting creditors to reach the trust assets. In Stannert's Estate, 339 Pa. 439, 15 A.2d 360. However, this is not dispositive of the issue. The issue, as I ...


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